For the first time since 1997, the SEC has made significant amendments to Rules 144 and 145 under the Securities Act of 1933 (the "Securities Act"). The goal of the amendments is to increase the liquidity of privately sold securities and decrease the cost of capital by reducing holding periods and other resale restrictions. Notably, the amendments:
The amendments also specifically address, and simplify, the resale of debt securities, do not generally apply to shell company securities and make other technical changes to the rules.
The effective date of the amendments is February 15, 2008. The adopting release can be found on the SEC's website at http://www.sec.gov/rules/final/2007/33-8869.pdf.
The Securities Act requires registration of all offers and sales of securities unless an exemption from registration is available. Section 4(1) of the Securities Act provides such an exemption for transactions by any person other than an issuer, underwriter or dealer.
Rule 144 provides a framework for securing the section 4(1) exemption for the resale of restricted securities (securities acquired from the issuer or from an affiliate of the issuer in a transaction not involving any public offering) or control securities (securities held by an affiliate of the issuer).
Rule 144 states that a selling security holder will not be deemed to be engaged in a distribution of securities, and therefore not an underwriter, with respect to such securities, thus making available the Section 4(1) exemption if the resale satisfies specified conditions. The conditions include the following:
Prior to the amendments, if the securities had been held by a non-affiliate for more than two years, the nonaffiliate could resell the restricted securities without regard to these conditions.
Securities Act Rule 145 requires registration of securities issued in business combination transactions, unless an exemption is available. Rule 145(c) deems persons who were parties to such a transaction, other than the issuer or its affiliates, to be underwriters. Rule 145(d) permits the resale, subject to specified conditions, of securities received in such transactions by persons deemed underwriters. An important consequence of Rule 145 has been that affiliates of the target company in a registered stock-for-stock merger have been subject to resale restrictions notwithstanding their lack of any ongoing affiliation with the acquiring company.
The Amendments to Rule 144
For the first time, the amendments to Rule 144 treat securities issued by Exchange Act reporting companies differently than those issued by non-reporting companies. Furthermore, the amendments differentiate between affiliates and non-affiliates in terms of the resale restrictions that are applicable to each for resales of restricted securities. Specifically, under the amendments:
The Amendments to Rule 145
The amendments to Rule 145 eliminate the presumed underwriter provision in Rule 145(c) and harmonize the requirements in Rule 145(d) with the amended provisions in Rule 144. By eliminating the presumptive underwriter rule, the amendments eliminate the restrictions on the resale of shares received by acquired company stockholders in registered stock-for-stock mergers unless the stockholder is an affiliate of the issuer or one of the parties to the transaction is a "shell company." If one of the parties to the transaction is a shell company, such party (other than the issuer) and the affiliates of either party will continue to be regarded as underwriters of the securities issued and can sell under the following conditions:
The amendments codify several interpretations previously adopted by the Staff of the SEC, including:
Elements of Rule 144 are incorporated into other SEC rules and the SEC made conforming changes to these rules, including changes to Regulation S and Rule 701.
In connection with the amendments to Rule 144, the SEC amended Regulation S to conform the distribution compliance period in Rule 903(b)(3)(iii) for Category 3 reporting issuers to the amendments to the Rule 144 holding period. As a result, U.S. reporting issuers will be subject to a distribution compliance period of six months under Regulation S.
The limitations for resales by non-affiliates under Rule 701 include references to paragraphs (e) and (h) of Rule 144, which under the amendments no longer apply to resales by non-affiliates. The SEC amended Rule 701 to remove references to Rule 144 volume limitations and Form 144 requirements from Rule 701.
The amendments will eliminate the manner of sale requirements for resales of debt securities held by affiliates. Furthermore the Rule 144(e) volume limitations for debt securities will be raised to permit the resale of debt securities in a three-month period in an amount that does not exceed ten percent of a tranche in which the securities were issued.
For additional information, please contact Dan Winnike, Chair, Corporate Group at email@example.com, 650.335.7657.
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